Royal Caribbean Cruises Ltd. (NYSE:RCL) : Short Bursts of Risk Exposure In Options Create Opportunity
Date Published: 2018-12-6
DisclaimerThe results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
PrefaceWith the market's direction becoming tenuous, we can explore option trading opportunities in Royal Caribbean Cruises Ltd. (NYSE:RCL) that do not rely on stock direction.Over both the most recent bull market and the last bear market from 2007-2008, for stocks with certain tendencies, there has been a shrewd approach to trading pre-earnings volatility with options.
The goal is to find trades that expose risk in short-bursts of time, with out-sized historical gains relative to historical losses.
The Trade Before Earnings in Royal Caribbean Cruises Ltd.
Let's examine the results of getting long a weekly at the money straddle 4-calendar days days before earnings, and then sell out of that position one-day before the actual release earnings.
Here is the setup:
We are testing opening the position 4 calendar days pre-earnings event and then closing the straddle 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:
If we did this long at-the-money (also called '50-delta') straddle (using the options closest to one-week in expiration) in Royal Caribbean Cruises Ltd. (NYSE:RCL) over the last three-years but only held it before earnings we get these results:
The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).
The results show a 49.1% return, testing this over the last 12 earnings dates in Royal Caribbean Cruises Ltd.. That's a total of just 36 days (3 days for each earnings date, over 12 earnings dates). That's an annualized rate of 497.8%.
We can also see that this strategy hasn't been a winner all the time, rather it has won 6 times and lost 6 times, for a 50% win-rate and again, that 49.1% return in less than two-full months of trading.
Setting ExpectationsWhile this strategy has an overall return of 49.1%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 4.66%.
Tested Across Bull and Bear Markets
While many times we can identify strategies that work during a bull or a bear market, this strategy, when we tested it empirically, worked during both. Here are the specifics:
Using the Nasdaq 100 and the Dow 30 as our study group, here are the average total returns by stock for the bull market from 2012-2018 (January) and 2007-2009, which includes the bear market, and the wild 2009 -- where the S&P 500 bottomed in March and then ripped higher -- in other words, a highly volatile time in the market.
As a quick reminder, here is the 2007-2009 period for the S&P 500:
|Time Period||Return by Stock|
Since we are looking at total returns, it turns out those time periods show nearly identical results (2012-2018 was six-years and 2007-2009 was three-years). Yet more impressive, the strategy showed a 57% win rate by stock during the wildly volatile 2007-2009 market.
These results are empirical, which is to say, they are objective. We are not inserting opinion.
WHAT HAPPENEDThis is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.